Physical Gold Demand Shows Presence Among Poor Sentiment

by on November 6, 2013 3:26 am GMT

Gold is down, roughly, 22 percent as investors are uncertain whether the precious metal can retain value as a store of wealth, but even in the massive yearly downtrend gold is finding spots of increase physical demand. This is leading to the assumption that even with a 22 percent discount, bullion buyers are snatching up ounces of gold for wealth diversification.

Australian refiner Perth Mint filled backlogged orders as physical demand is spurred due to the three-month lows in gold in October. Perth Mint’s sales in bullion, both coins and minted bars, increased 13 percent from 68,488 troy ounces in September to 77,255 troy ounces in October. In comparison, sales in October are more than doubled in August sales of 30,430 troy ounces. Interestingly, gold prices in August were relatively similar in October except for the short rally at the end of the month to reach $1,434 per ounce.

In my opinion, the increasing political fiasco in Washington D.C. is forcing private investors, and countries alike, to hedge their dollar exposures. The never-ending quantitative easing from the Federal Reserve is also making some nervous and losing faith in the greenback. As institutions sold paper gold from exchange-traded funds at an astonishing pace, the price has become enticing.

Ron Currie, Perth Mint’s sales and marketing director, said that people are willing to buy when prices are this low. “We’re getting a lot more product out the door because of previous orders that we hadn’t been able to supply because of capacity,” Currie said.

The United States Mint is also seeing a lot of demand with sales of 755,500 ounces of the American Eagle coins as of November 1. This is compared to the 753K ounces sold in all of 2012.

The one gold “product” that has not seen demand are exchange-traded products which has seen a 29 percent drop as of November 4, according to data provided by Bloomberg.

Although, I believe gold can be purchased at lower levels as the financial markets are continued to be held up by the printing presses. In the short-term, it may even be a lose-lose scenario for gold until March, which I believe gold could rebound from a low under $1,100 per ounce.

Even with the increase in physical gold, the price in gold does not reflect the demand. Asian demand continues to increase in India and China. China has purchased over 1,000 metric tons of gold this year. The gold spot price is heavily influenced by paper gold and institutions. Until the bearish sentiment from the market dissipates, gold could drift lower.

Also, the Federal Reserve is pumping massive liquidity into the market. It’s ironic. This action sparks inflation fears and a potential financial crisis in the near future, yet it is the Federal Reserve policies keeping money out of gold and into equities. Thus, gold prices suffer. It is unlikely the Fed will taper until economic data is much better than it is currently, regardless of the recent optimism. A taper in the Spring should bolster the yellow metal.

Peter Schiff is a world renowned gold bull, and he believes a disaster is brewing. Schiff has recently said gold could easily double in value over the next year. Although I concur with his overall outlook of gold becoming a valuable asset in the future, gold still has a little bit to endure until seeing its full shine.

In reality, those that believe hyperinflation is inevitable are buying regardless of price for the most part. However, many private bullion investors are cost-conscious, and gold bullion could be invested like a stock by dollar-cost averaging. An investor looking to buy stock would not buy with the full cash allocation. Gold is no different. Perhaps, a gold investor could allot 25 percent of their gold allocation each quarter. Either way, maxing out an allocation in one purchase limits the ability to buy at a lower price and buying more in quantity.

According to inflation data, current inflation is still well-under the Federal Reserve’s two percent target. Until data starts pointing in gold’s favor, gold could continue to sell at discount allowing investors to strategically add to their reserves.